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FIGURE 2.3
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$_________________
1. Annual Income Goal
(100% of your current income)
2. Estimated Social Security Benefits $_________________
3. Estimated Pension Benefits $_________________
4. Retirement Income Gap $_________________
(subtract lines 2 and 3 from line 1)
5. Lump Sum Needed $_________________
(divide amount on line 4 by .03)
6. Current Retirement Assets $_________________
(IRA, 401(k), and other sources)
7. Total Lump-Sum Gap $_________________
(subtract line 6 from line 5)
To use the table, find your earnings level on the left, and the
chart will give you an idea on the right of your expected benefits.
As we mentioned earlier, this exercise is overly simplified to
provide a basic understanding of what kind of retirement nest egg
you are going to need. By relating the monthly income needed to a
lump sum, we hope to help you visualize the task that lies ahead.
Many of you will have various types of assets that will provide
you with a retirement income. Assets are great, but when you are
retired and not bringing in a paycheck, all that really counts is the
monthly income those assets may or may not generate. As men-
tioned earlier, if you have a lot of equity in your home and a valuable
art collection you would rather not sell, neither can be used in cal-
culating your lump-sum gap. In reality, these kinds of assets usually
just increase the gap.
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FIGURE 2.5
6$03/(:,6+ /,67
Dreams Cost
Cabin $100,000
Pleasure Boat $125,000
New Car $145,000
Country Club Membership $125,000
Weekly Golf: $125/round for 10 Years $162,500
Vacations: 4/year @ $2,500 Each $100,000
College for Grandchildren: 3 @ $25,000 $175,000
Total Cost of Dreams $432,500
Don’t be discouraged if that lump-sum gap seems so huge that
you’d feel foolish even thinking about “the better things in life.” We
have found that it’s easier for most of us to sacrifice for something
we “want to have” as opposed to something we “should be doing.”
We should all save money every month but do we? If you fall in love
with that new car, just think how easy it was to justify that extra
$200 a month to pay for it. In 20 years that car will be paid off and
worth just a few thousand dollars. Rather than buy the car, if you
had committed to putting the $200 in a bank account each month
for those 20 years, you would have accumulated $48,000 by now.
Sit down with a paper and pen and start listing all the things
you would like to enjoy when you retire. Don’t forget anything.
Henry David Thoreau said, “In the long run, we only hit what we
aim at. Aim high.” Aim high, so if you miss a few things along the
way you’ll still be a big winner. Figure 2.5 is a sample wish list and
an estimate of what these kinds of dreams may cost.
Think we’re crazy? You already have a lump-sum gap and now
we’re talking about adding almost half a million dollars to that fig-
ure! In Chapter 6, we will teach you in detail about the power of
compound interest and leverage, and how real estate investing takes
advantage of those simple principles. Here’s a taste of how it works
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- CHAPTER 3
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675$7(*,(6
“October: This is one of the particularly dangerous months to invest in stocks.
Other dangerous months are July, January, September, April, November,
May, March, June, December, August, and February.”
² 0$5. 7:$,1
: e’ve spent the first two chapters imploring you to take
charge of your financial future. As you’ve learned, the outlook for
most is grim. There is an old saying about it never being too late,
but the truth is, if you don’t start planning for your future, it can be
too late. If you believe the statistics, 95 percent of those eager to
retire one day are on the road to nowhere.
6 75,.,1* ,7 5,&+
You’ve probably noticed that we’ve yet to talk about getting
rich in this book. This is because getting rich is really a state of
mind based on your definition of the word. “Rich” implies reaching
a goal of obtaining a certain amount of money rather than actually
achieving true desires and needs for you and your family. What’s
more, for an adult who is truly grounded, striking gold without hit-
ting the lottery is simply beyond the realm of what is possible.
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2. “Too busy just hangin’ on”: These are baby boomers who
are in the middle of their working lives. They have families,
mortgages, and worries. Their prayer is that Social Security,
a boom in the stock market, the company pension plan, or
their children will help fill the bill when their retirement
time comes. Their big fear is that they won’t.
3. “Worried it may be too late”: This is the over-50 crowd, and
when it comes to retirement, they’re scared to death. Statis-
tics show that once they retire they’ll probably have to go
back to work as a greeter at their local Wal-Mart to make
ends meet. Time is running out and they know it.
Thankfully, there is hope and, better yet, solutions for each of
these groups, including group three. As authors and real estate
investors, we have had plenty of personal experience living and
succeeding through the stages of groups one and two. And profes-
sionally, as real estate brokers, we have helped countless people in
the “it’s probably too late” group fund comfortable retirements
through real estate investing. We’ll begin by talking to those
who’ve “got plenty of time.”
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they’re not orbiting the earth from the space shuttle, but the view
from the clubhouse at Pebble Beach is just as breathtaking.
As you begin making money it’s tempting to spend not only
the money you earn today but also to borrow on what you will make
in the future: lots of dinners out on your charge card, a new car
every few years, a big-screen TV financed at the credit union, and
a tax refund loan to pay for a summer getaway. Yes, you can afford
it. The problem is you get used to spending most (or all) of what
you earn and not putting any away for your future. If this is you,
you’re headed for trouble.
To succeed and take advantage of real estate investing to help
you reach your dreams, we’re going to assume you’ll agree to make
a few small sacrifices early on. From there, we’ll show you where
those small sacrifices might take you from an investment stand-
point. And because we don’t want you to think you will have to sac-
rifice on this program forever, we are going to be working with just
some of your earnings for the next five years. We’ll make the follow-
ing assumptions: You can save enough each year from your earn-
ings and tax refund to invest $5,000 a year for those first five years.
Additionally, instead of buying that new $25,000 car on credit, you
will put the same amount as the payment into a savings account
each month to be invested in year five.
The following numbers come from using the compound inter-
est formula to project your future net worth based on various rates
of return. In Chapter 6, we explain how the compound interest for-
mula works in great detail. For now, we’ll just jump to the end result.
The following table shows how your investments can grow at two
modest rates of return. We used a 20 percent and a 25 percent com-
pound rate of return on equity for these examples. The grand total
numbers might seem astronomical, especially if you’re used to look-
ing at typical rates of return from CDs or stocks or mutual funds. But
remember, real estate benefits from leverage, and leverage is what
puts real estate investing into a stratosphere by itself. Because of
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company pension plan being enough. Or do you want to ensure
that you’ll be in the 5 percent who are financially independent at
retirement by making a few small and smart real estate investments
now? The decision should be an easy one.
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sure you realize that most of these decisions in life involve money. If
you buy the new BMW instead of driving the paid-for Chevy, your
wallet will be that much lighter every month. The truth is, either
way, in five years all you’ll have is a used car.
If this were just a one-shot decision, we wouldn’t be mention-
ing this concept, but it’s not. It’s your complete way of thinking
about money and spending and saving that has to change. It’s about
where you shop for almost everything you buy. Do you mow your
own lawn for the exercise, or do you pay someone to do it and pay
an additional $35 per month to a gym that you don’t use? Do you
iron your own shirts while watching TV or send them out? Three
years of sending your shirts out to be cleaned at $1.25 each costs
$937.50. This $937.50 would be the FH A down payment on a
$30,000 piece of property. In many parts of the country, $30,000
will buy a decent home. Are you getting the point?
Now try substituting the word “greed” for “want” and the deci-
sion becomes one of greed versus need. If you think about all the
things you’ve bought when you spent more than you needed to,
you’ll probably come to the same conclusion that we have about
most items: that is, the wanting brought you more enjoyment than
the having.
In fact, for an exercise, conduct a complete financial review of
yourself. Write down all the areas each month where you spend
money. Many of your expenses will be completely legitimate. Oth-
ers, however, will strike you as frivolous and a complete waste. The
goal is to find areas where you could save by fulfilling needs instead
of wants. You don’t have to give up all the nice things in life. You
just need to sacrifice a little bit now so you can have a lot later.
Ralph Waldo Emerson said, “There is really no insurmountable
barrier save your own inherent weakness of purpose.” To that end,
sell the BMW and pay cash for a used Chevy. Sell the motor home
and buy a tent. Iron those shirts, mow the lawn, and get your videos
for free at the library. Refinance the house and pull out some money
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for we have helped countless families, friends, and clients like you
deal with the financial challenges that go with planning for retire-
ment at your age. Though it may seem like it, it is definitely not too
late to make a real difference in your picture. A key advantage for
you is you have a world of experience to draw from. Here is a story,
a few thoughts, and, finally, our ideas.
In 1954, Ray Kroc, a traveling Multimixer salesman, signed a
contract to use the hamburger-selling ideas of the McDonald broth-
ers to open a few places of his own. In his book, Grinding It Out,
Kroc describes himself as “a battle-scarred veteran of the business
wars.” He had been working for more than 30 years so far (hadn’t
graduated from high school) and was battling diabetes and arthritis
and the effects of losing his gall bladder and most of his thyroid. At
the time he began his burger empire, he was 52 years old. For most
of us, 52 is when we want to start slowing down. Starting a business
that we knew nothing about wouldn’t even enter our minds. None-
theless, for Ray Kroc the rest was histor y. By 1976 McDonald’s
would surpass $1 billion in total revenue. It took IBM and Xerox 46
years and 63 years, respectively, to reach that mark.
We’re not suggesting you become a hamburger mogul, but we
do want you to realize what is possible for those on the latter end
of their working lives. Kroc’s stor y is incredible — you probably
won’t duplicate it. What we want is for you to seize the opportunity
America has to offer so you can live the happy ending to your story.
In the words of a French proverb, “To believe a thing impossible is
to make it so.”
We began this section with some words about risk and exces-
sive caution. In all likelihood, if you’re not comfortable now, it’s
probably because you didn’t take a couple of chances at success
when you were younger. Alternatively, perhaps you did take some
chances, but for one reason or another they just didn’t work out.
Our ideas and this book are meant to give you some concrete ways
to give it another try. Helen Keller said, “When one door of oppor-
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goal is to either pay all cash for a building or, alternatively, put
down at least a sizable amount of money to minimize any mortgage
payment. However, if you can work at least ten more years, you still
have the time to take advantage of some amount of leverage. Your
goal will be to find one or more properties that will provide you
with the greatest cash f low at that retirement point. Because the
most conservative goal is to have that property paid off by the time
you retire, let’s work toward that end.
An ideal property would be one with an assumable loan that
would be fully amortized (paid off) the month you retire. It would
be even better if the down payment were exactly the same as your
investment nest egg. We know this doesn’t always happen, so here
are a few ideas that can help you get close:
1. We have found that most mortgages that are at least ten
years pay off principal at a fairly rapid clip. Also, by making
an additional principal payment each month, most of these
loans can be paid off in about half the time as the current
payoff date. In many cases, any cash f low from the property
could be enough to help accomplish that task. The more
you focus on sound management, the faster you can get that
loan paid off.
2. If you can’t find a property you can pay off on its own mer-
its, you may have to help it along when you retire. It may not
work out for you to live in your rental building, so one solu-
tion might be to sell the big house and buy a smaller prop-
erty in a retirement area. You can use some of the extra
proceeds from the sale to pay off the balance of the mort-
gage or reduce it enough so you can get it paid off very soon
after retirement.
3. If you are in a limited down payment situation, you may
have to count on leverage more than we have been talking
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If, however, you are committed to keeping your house (and it
is perfectly OK if you are), you should look into refinancing it to
generate the cash necessary to invest in income property. At this
point, if you’ve had your loan for many years, a large portion of your
payment is probably going toward paying off the loan. This is called
principal reduction. In most cases you can take out a new loan and
keep your payment close to the same as it currently is. A move like
this should net you enough cash to make a nice investment in a
rental property. And a rental property with a decent - size down
payment could bring you a nice monthly income. The idea is to
keep your house payment the same and create an increased cash
f low from the property you purchase.
Another added attraction is that your tax benefits from your
home will increase, because the interest part of your payment will
now be higher. Remember, you can’t deduct the portion of your
payment that goes toward principal, only the interest portion.
The table that follows may give you some examples of the
kind of cash f low you might expect from the funds you take out of
your home. The percentages are the cash-on-cash return from the
amount invested in the property. The amount invested is the down
payment, which is the number on the left-hand side of the chart.
The dollar figure under the percentages is the estimated annual
cash f low.
Estimated Annual Cash Flow
Amount Invested 10% 15% 20%
$225,000 $22,500 $23,750 $25,000
$250,000 $25,000 $27,500 $10,000
$100,000 $10,000 $15,000 $20,000
$150,000 $15,000 $22,500 $30,000
For most of us who ended up with a larger home for the family,
this extra space really isn’t needed once the kids leave home. The
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